Saudi Arabia's reserves: Is the glass half empty?

Feb 25, 2004 01:00 AM

by Kate Dourian

You may have seen recent reports about the big hit Shell took after it was forced to revise its reserves estimate.
The jury is still out on this matter.
One area where Shell has had to cut its reserve estimate is Oman, where production from difficult fields that produce
more water than crude oil has forced a decline in crude oil output in the last two years. But Oman is a small,
independent producer holding just a fraction of the world's reserves.

A small adjustment here or there is not going to upset the world's energy balance. But start casting doubts about
Saudi Arabia's crude oil reserves, generally estimated at a quarter of the world's total, and you raise a lot of
dust.
That is precisely the contention of a report that was due to be presented on February 24 to the Centre for Strategic
and International Studies in Washington by Houston-based energy analyst Matt Simmons.

In excerpts of the paper, Simmons questions whether Saudi Arabia can remain in a position toplay the role of "swing
producer," i.e. to raise or cut its crude oil production to meet unexpected shortages or gluts on the world market.
Simmons contends that Saudi Arabia's oil production "as we know it is remarkably fragile," and warns that the kingdom
could face a decline in the next five to ten years as severe as that witnessed in Russia in the early 1990s.
Incidentally, Russia has recovered from that slump and its production near the 8 mm bpd mark now rivals Saudi
Arabia's. Russian oil production is set to rise further next year and the world's second biggest producer/exporter is
not constrained in production by OPEC rules and quotas.
But when Russia's production rises to 9 mm bpd, that would be its maximum capacity with not a drop to spare. And
Iraq, the country with the second biggest oil reserves after Saudi Arabia, is no help at the moment as its production
struggles to go much beyond 2 mm bpd.

This puts the onus on Saudi Arabia, which has shown in recent months that it can tailor production to suit market
conditions. It has always been assumed that Saudi Arabia can turn up the taps and add 2 mm bpd to world supply within
a short period of time.
This ability to act as the world's producer of last resort has been tried and tested already. During the Iraqi
invasion of Kuwait, the loss of some 5 mm bpd of combined production from Iraq and Kuwait was compensated for, mostly
by Saudi Arabia. Granted the kingdom is not the most forthcoming when it comes to data. Saudi Aramco as a state
monopoly tends to extend its proprietarily policy to information, making it difficult to refute such accusations.

Simmons used reports written by Aramco geologists and engineers in preparing his paper. There has been no suggestion
in any of the public statements by Aramco officials that they are concerned with a production decline any time soon
and the company is investing heavily in expanding its production capacity.
Saudi Aramco puts proven reserves at 259.4 bn barrels and says that it has been able to replace production with new
reserves, allowing it to keep its reserve estimate unchanged.

I won't bore you with more numbers but suffice it to say that production declines are a normal phenomenon in any oil
producing area. The North Sea was supposed to have locked up its oil rigs and given its grey waters back to the fish
back in the 1990s.
New technology and drilling techniques have kept production going from what is a relatively young oil region. The
North Sea did not really come into its own as a major oil producing area until after the oil shock of 1973, when the
West started drilling in places considered too costly before to make sure they would never again be hostage to Arab
oil.

People usually roll their eyes and yawn when I tell them what I do for a living. My response is always to point out
to the fact that crude oil is the most political commodity and that makes it a fascinating subject.
So it makes you wonder when a US-based analyst, who reportedly acted as an informal adviserto President George W.
Bush in the 2000 presidential campaign, starts to cast doubt on Saudi Arabia's reliability as an energy supplier at a
time when relations between Riyadh and Washington are not at their best.
I am not a conspiracy theorist but you do have to ask. Is it just a case of someone seeing the barrel half empty or
is there a bit of politics mixed in?

The author is Middle East Editor of Platts, energy information division of the McGraw-Hill Companies. The opinions
expressed in this column reflect those of the author and not of Platts.